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Market volatility, debt & the commodities slide.

October 21st, 2011 · Greg Atkinson · 34 Comments

Over the last six months stock markets globally have become more volatile as Europe and the U.S. struggle to revive their economies.  To make things more complicated many advanced economies have racked up so much debt during the ‘good times’ that they now don’t have the capacity to spend their way out of trouble.  There will be no quick fixes and the situation is worrying enough to even rattle the commodities bulls.

Rather than focus on the daily movements of the markets I prefer to look at the bigger picture to see if I can pick out some themes or trends that might help  make some sense out of all this chaos.

So let’s firstly look at the U.S. S&P 500 Volatility Index or VIX.

S&P 500 Volatility Index chart (VIX)

 

vix-sp-500-6-month-chart-oct-11

Over the last six months the VIX has risen from around 15 to around 35 and most of this gain has been since late July.  We can’t just blame the Europeans and their debt mess for this as the U.S. economy isn’t exactly in good shape either.

The VIX chart is telling us what we already know – that the U.S. stock market has been posting some decent gains only to have these wiped out by some pretty nerve testing slumps.

Generally speaking, long term stock market investors like to see the markets a lot more calmer than they are now and in VIX terms, that would be around 15 or lower.  But remember, the VIX tracks volatility and so it can be quite low even during a bear market.  A less volatile market doesn’t necessarily mean that stock prices are rising.

Possibly more worrying for Australian stock market investors is that commodities prices have been on the decline now for some months.  Various mining company CEO’s have been doing their best to convey a bullish outlook for commodities like coking coal and iron ore, but the reality is that the overall price trend for these at the moment is downwards.

Commodities Futures Indexes

commodities-futures-oct-2011

The chart above shows a variety of commodities related indexes such as the UBS Bloomberg CMCI (red) and the Rogers International (blue) but it is really the overall trend I am interested in.  Despite a recent bounce off a low, the commodities futures are trending down.

Maybe commodities are about to stage a rally and recover lost ground but I doubt it.  My personal (and probably flawed) view is that the commodities cycle is turning and that prices will head lower and remain below their records highs for some years.

As regular site visitors will know, I have been warning for some time that commodities prices would fall back  and not merrily keep heading towards the stratosphere as many people appear to believe.  Many in the financial media would scoff at that idea but if we look at the stock price chart for BHP Billiton then it appears that many investors share my view…at least for now.

BHP Billiton (ASX:BHP) 6 month stock price chart

bhp-6-month-stock-price-chart-oct-11

Back in April, BHP shares traded just below $50. Today BHP stock is trading around $35 so that suggests to me that many investors are have indeed become cautious about the outlook for commodities.

If you are bullish on the outlook for Chinese economy or regarding commodities in general then BHP is probably trading at fairly attractive price.  My view is that there is simply far too much risk out there and at this point in time I am comfortable with being underweight in the commodities area.

Lastly a quick review of the ASX 200 will show us how  the Australian stock market has fared over the last six months.

S&P/ASX 200 Index (ASX:XJO) 6 month chart

asx200-6-month-chart-oct-11

Since May it’s been a somewhat bumpy ride down to what appears to have been a market bottom of just below 4000.  If France & Germany can work out their differences regarding a bailout fund then we should see the S&P/ASX 200 head up near 4400.  But we need to keep in mind that economic growth in Europe is at best anaemic and that the U.S. economy is on the brink of dipping back into a recession.

Overall I remain very cautious regarding the outlook for the global economy and believe it is going to be a tough year for the Australian economy in 2012.  At some point we should see the market start to rally again, but I don’t think we are near that stage quite yet.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


34 responses so far ↓

  • 1 Stillgotshoeson // Oct 21, 2011 at 9:37 pm

    If QEIII in the USofA and a multi trillion dollar bailout in Europe do occur then a bullish run up on the ASX to 4400/4500 occurs I will be selling out of everything except precious metal stocks.

  • 2 Ned S // Oct 21, 2011 at 9:59 pm

    We won’t get a multi-trillion $ bailout in Euroland anytime soon apparently Shoes. But in the interim we’ve got the next best thing they can dish up for now this bloke reckons? :

    http://money.msn.com/investment-advice/has-europe-saved-itself-fleckenstein.aspx

  • 3 Lachlan // Oct 22, 2011 at 7:37 am

    All metal construction here Shoes 😉

    Liking the AUD gold chart this week coming..already bought more physical and maybe punt on the ETFs for a short term bet this week.

  • 4 Greg Atkinson // Oct 22, 2011 at 8:19 am

    Well it appears the French & Germans might have agreed on a way to solve a few short term issues in Europe and the markets rallied overnight. But as I said in the above post it’s unlikely that growth across the EU is going to be solid for some years.

    At the moment I am focused on watching commodities prices especially iron ore & copper. If they can rally next week & break the downwards trend then the Australian stock market will probably follow this lead.

  • 5 Lachlan // Oct 22, 2011 at 12:38 pm

    Its hard to see the future in my crystal ball today but i feel if the XJO pops its head up to 4350 and if the AUDUSD pops to 1.06 they will get their heads lopped there in a violent way …and the same too with copper Greg.
    The action has been weak and flagging of late…maybe we will need to close closer to 3600 on the XJ0 to get a decent rally started…anyhow its the only way I’ll ambush NCMs near 30 bucks… so therefore it must happen 🙂

  • 6 Biker // Oct 22, 2011 at 5:09 pm

    Interesting to see Sayce pan copper (and China) one day and see this result the next:

    http://www.hardassetsinvestor.com/market-monitor-archive/3158-market-wrap-oil-rises-copper-surges-5-percent-ahead-of-eu-summit-fed-mulls-qe3.html

  • 7 Ned S // Oct 22, 2011 at 11:36 pm

    I’m so glad I don’t play the markets – I’d have been bankrupted more times than I could even begin to count …

  • 8 Biker // Oct 23, 2011 at 9:34 am

    These daze it’s equivalent to online poker, Ned!~ 😉

    Enjoyed this:

    http://slyoyster.hypervocal.com/cheap-thrills/2011/decades-old-calvin-and-hobbes-strip-succinctly-explains-occupy-wall-street-movement/

  • 9 Biker // Oct 23, 2011 at 10:24 am

    Imagine the situation for those approaching retirement, who _relied_ on FAs’ and FMs’ reassurances… and kept shares as a major component of their Super.

    I think I mentioned that I left exactly $1000 in indexed shares in Super, at the time of my retirement, 2nd April ’11. This morning it’s worth just $832.

    My purpose was to demonstrate to the missus that her large nest egg was much safer in cash, at this stage, until the sharemarket (might) crash’n’burn and we’d again transfer back into shares.
    Might not ever happen… but she’s around 21% ahead, anyway! 😉

  • 10 Lachlan // Oct 23, 2011 at 8:27 pm

    Buy cheap, buy small (low risk) and sleep well for as long as it takes Ned. Other than that tangibles…I wont mention my favourite one though 😉

  • 11 Stillgotshoeson // Oct 23, 2011 at 10:20 pm

    Biker // Oct 23, 2011 at 10:24 am

    I think I mentioned that I left exactly $1000 in indexed shares in Super, at the time of my retirement, 2nd April ’11. This morning it’s worth just $832.

    You could have bought 350 Telstra shares for $980 bucks on the 12th April instead for $2.80 each + $19.95 brokerage.

    350 @ $3.14 = $1099 + 14 cents a share dividend (so far, another 14 cents in Feb 2012) = $49 + another $49 in Feb 2012

    $1197… Not a speculative play, a straight up quality blue chip.

  • 12 Biker // Oct 23, 2011 at 10:46 pm

    Hey, hindsight is 20 / 20, Shoes.

    I always preferred it when you posted long lists of speculative buys, predicting a complete range of specific outcomes… 😉

    But unless you have a SMSF (as you do), there’s no way to allocate funds to _specific_ shares (within a Super fund.)
    The object of the exercise was solely to demonstrate that cash was a far better bet than indexed funds.
    It was a very cheap demo!~ 🙂

  • 13 Stillgotshoeson // Oct 23, 2011 at 11:57 pm

    But unless you have a SMSF (as you do), there’s no way to allocate funds to _specific_ shares (within a Super fund.)

    Not true, some industry funds allow you to buy shares direct, Australiansuper for example allow you to buy shares in the ASX200
    (soon to be expanded to the asx300 I believe)

    The object of the_post_ was solely to demonstrate that buying the index is not the best way to go… 😉

  • 14 Lachlan // Oct 24, 2011 at 6:28 am

    I might put off my ETF this week even though the AUD Au is approaching a tech buy level or thereabout (it may give way). The markets look messy and neutral with weak action and this means that some glaring technical lows at least have a higher than usual chance of occurring soon.

    They are crudely..

    USD gold at 1450
    USD silver 21-22
    AUD USD at 88
    USDX at 85
    XJO at 3600

    That’ll give us something to talk about 🙂

  • 15 Biker // Oct 24, 2011 at 9:19 am

    Lachlan, I can’t decide whether I like gold or silver more.
    I guess it could be either ore.

  • 16 Greg Atkinson // Oct 24, 2011 at 9:30 am

    It appears that over the weekend the Europeans have almost agreed to do something which these days is enough to rally the markets. Perhaps if we have a few good days this week we might see the ASX All Ords & S&P/ASX both reach 4400.

  • 17 Lachlan // Oct 24, 2011 at 3:16 pm

    Ha ha BP 🙂

  • 18 Lachlan // Oct 24, 2011 at 5:48 pm

    I’m not predicting those lows will be hit, they’re just targets if we do go down and it looks like chances are higher than previously…..sounds exciting for accumulators.
    I’m neutral, unsure ie market looks trendless after some key tech levels have been broken in various things.
    Still believe no lower than 09 lows for XJO but compressed sideways range looks entrenched now.

  • 19 Lachlan // Oct 24, 2011 at 7:16 pm

    That oresome post above must have been too much for Greg to resist BP…other than that your just too naughty for most people to control 😉

  • 20 Greg Atkinson // Oct 25, 2011 at 8:05 am

    Looks like commodities & stocks are still heading up mainly because the Europeans will try and bail themselves out of a debt hole. I still get the feeling that after a few days investors will once get over the initial optimism and start to focus once again on the problems that are still out there.

  • 21 Leigh // Oct 25, 2011 at 4:36 pm

    I spend one out of every two weeks in the wilderness of my farm so I don’t follow the markets as closely as most of you appear to. This means I get a weekly check on where my 22 share portfolio is going and have noticed that despite today’s fall there has been a four week rally since the 24th of Sept. No big deal but I haven’t had four weeks of green in a long long time. If we get a real plan in Europe, we could see an end to the volatility. Well, what else can go wrong?

  • 22 Greg Atkinson // Oct 25, 2011 at 6:07 pm

    Leigh you probably have the right approach in that I think many of us watch the markets too closely. I suspect once things calm down (if that’s possible) in Europe then all eyes will be on the U.S.

  • 23 Biker // Oct 25, 2011 at 6:26 pm

    Leigh: “Well, what else can go wrong?”

    Well, Roubini is certainly going _way_ out-on-a-limb here!:

    http://www.perthnow.com.au/business/business-old/professor-nouriel-roubini-tips-50pc-chance-of-another-recession/story-e6frg2qu-1226176531613

    Mind you, nearly two years ago he said gold wouldn’t rise. 😉

  • 24 Ned S // Oct 25, 2011 at 11:38 pm

    It will certaintly be ‘nice’ (one way or the other) to see the market reaction after Wednesday Euroland time.

  • 25 Ned S // Oct 26, 2011 at 1:20 am

    Damn! The dog ate the EU Finance Ministers’ homework … Nevermind, the EU top dogs are still chatting/chewing on each other apparently:

    http://www.londonstockexchange.com/exchange/news/sharecast/news-detail.html?newsId=4611100

  • 26 Greg Atkinson // Oct 26, 2011 at 6:06 am

    It’s all happening Ned. As per usual the markets rally on the smell of good news and then fall back when there is bad news. Overnight investors were disappointed not only by the continuing debt saga in Europe but also by some weak numbers out of the U.S. We also have more people warning about a slowdown in China. (which as you might recall I have been talking about since last year)

    Summary – the global economy is still in the Twilight Zone and nobody knows how it will fare in 2012.

  • 27 Stillgotshoeson // Oct 26, 2011 at 7:55 am

    “Summary – the global economy is still in the Twilight Zone and nobody knows how it will fare in 2012.”

    Badly is my call……

  • 28 Biker // Oct 26, 2011 at 9:06 am

    “…nobody knows how it will fare in 2012.”

    _Nobody_ knows is my call.

  • 29 Greg Atkinson // Oct 26, 2011 at 9:43 am

    It does appear that the divide between the China bulls and bears is growing wider. Roubini and Chanos for example sounds quite bearish whereas the mining executives at BHP & RIO plus the RBA sounds quite bullish.

    Normally you would think the mining executives would have the best data but as I recall the dot.com executives were also very bullish just before their world came crashing down in 2001.

    One thing seems for sure, the U.S. and Europe are unlikely to power the global economy next year.

  • 30 Biker // Oct 26, 2011 at 4:41 pm

    China to save the PIIGS!:

    http://www.perthnow.com.au/business/china-agrees-to-help-eurozone-report/story-e6frg2qc-1226177592104

    And Twiggy wants China ‘to become part of the commonwealth…’
    QE2 all over again? 😉

  • 31 Lachlan // Oct 28, 2011 at 5:54 am

    USDX is breaking down through support levels without any effort at turning. Our market is breaking strongly through resistance with the AUD/USD and no signs either of a pause, well yet. Very strong moves. Next stop after 4350/4400 area, if we leave it behind, would be XJO 4600ish and AUD/USD 1.08 for wounded bears to re initiate shorts.
    Discount days are over for now at least for a moment. Will be interesting tonight again to see if we follow through or head fake.
    Glad I gave away shorting things but. Buy and hold sounds nice and lazy 🙂

  • 32 Greg Atkinson // Oct 28, 2011 at 7:53 am

    The VIX has dropped back to just over 25 but before we get too excited it is worth noting that the Baltic Dry Index seems to have turned and may be on the way back down.

    As I said in my post: “If France & Germany can work out their differences regarding a bailout fund then we should see the S&P/ASX 200 head up near 4400”.

    We are now near that point but at some stage I am pretty confident profit takers will come in as at the first hint of trouble.

  • 33 Stillgotshoeson // Dec 1, 2011 at 7:02 am

    Big but not unexpected news from Europe last night. Short term rally is looking good now, will we get a month out of it? Sentiment turns on a dime at the moment. A huge influx of cash into the system does not solve any of the problems. Is this the last hoorah?

  • 34 Greg Atkinson // Dec 1, 2011 at 7:43 am

    No problems solved but cash is moved around so the markets rally. It just illustrates how volatile things are now and I think it just sets things up for a fairly sharp move down again when the trading algorithms decide it’s time to take profits.

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